Insurance valuations and building reinstatement costing PREPARE FOR ANYTHING WITHOUT PAYING TOO MUCH NO ONE EXPECTS serious loss or damage to occur, but we all know we need to be prepared for the worst by having the right type of insurance. That’s where insurance valuations and building reinstatement costing comes in. The goal? To ensure that buildings are not over-insured or underinsured when a loss occurs. When rebuilding, there are two types of costs to consider – replacement cost and reconstruction cost. Replacement cost is the property insurance standard for calculating valuation basis. In a nutshell, it is the cost to replace an entire building with one of equal quality and utility. Generally, replacement costs are calculated using square-foot or unit-count methods. These costs, calculated using square-foot methods, are based on for labour, materials, overhead, profit, and fees that are in effect prior to the loss – not after. Replacement costs assume that modern materials and current methods, designs, and layouts will be used to replace the building. Reconstruction costs provide the cost to construct an exact duplicate of the building, at current prices, using similar quality materials, construction standards, design, layout, and workmanship. This is because it might be impossible, impractical, or unacceptable to use the materials or methods of the original construction. ‘Equal quality and utility’ may be substituted, where necessary, with ‘like kind and quality’.
30 | CONSTRUCTION ECONOMIST | www.ciqs.org | Winter 2018
These costs also include site-specific and process-related costs and fees sometimes not included in replacement cost valuations including: • Current building codes • Reuse of building components below grade level • Reuse of mechanical systems below grade level • Loss of economies of scale associated with new construction • Extra costs due to site accessibility • Costs of demolition or debris removal • Higher labour costs and premium prices for materials • Extraordinary fees and other contingencies Understanding the differences The distinctions between replacement cost valuations and reconstruction cost valuations are important to understand. An insurance carrier’s goal is to provide the owner with an equitable and fair settlement. Additionally, because policy and settlement terms are frequently subject to negotiation and court interpretations, it is essential that carriers receive premiums based on the fullest exposure of each building. That’s the building’s reconstruction cost. Figuring out replacement cost Research shows that the actual cost to reconstruct a building after a total loss is usually greater than the estimated replacement cost. That is because replacement cost valuations do not include costs arising out of current building codes or from a variety of costs and fees that are commonly present in total losses. To figure out overall replacement cost, Consulting Quantity Surveyors employ the Marshall & Swift program. Basic data, usually provided by the owner, is entered into the system and one of the following four ranks are applied: Low (Rank 1) – These tend to be very plain buildings that conform to minimum building code requirements. Interiors are plain with little attention given to detail or finish. Typically, there are minimum mechanical and low-cost finishes throughout. Average (Rank 2) – These buildings are the most commonly found. They meet building code requirements and there is some ornamentation on the exterior with interiors having some trim items. Lighting and plumbing are adequate to service the occupants of the building. Good (Rank 3) – These are generally well-designed buildings. Exterior walls usually have a mix of ornamental finishes. Interior walls are nicely finished and there are good quality floor coverings. Lighting and plumbing include better quality fixtures. To return to Table of Contents CLICK HERE
